Uganda pursues $212m China Loan for Dam Projects

Uganda had borrowed $1.9 billion from the Chinese lender to construct Karuma and Isimba dams, with the understanding that money to repay the loans will come from electricity tariffs.

Since Uganda is scheduled to complete Karuma and Isimba hydropower dams by the end of 2018, the government alongside China Export Import Bank (China Exim) are now working towards increasing the number of electricity consumers.

The government will get an extra loan from China Exim for increasing the number of domestic customers connected to the national power grid.

Currently, the government cannot collect this money, since there are no consumers for the electricity from the two dams. Once completed, the two dams will add an extra 786 megawatts onto the national grid.

The Cabinet has now decided to borrow Ush782.2 billion ($212.7 million) from China Exim in an order to ensure that these two dams do not become white elephants, once they are completed.

Above: the 600 megawatts Karuma Hydroelectric Power project. Uganda will get an extra loan from China Exim for increasing the number of domestic customers connected to the national power grid.

According to Uganda Electricity Regulatory Authority (ERA) spokesperson Julius Wandera, current electricity generation capacity stands at 927MW, while consumption is estimated at less than 600MW.

This means that even before completion of the two mega dams, Uganda has a surplus. This presents problems for policy makers in Uganda and their lenders in China, especially since electricity consumption hasn’t been growing for years.

Increased demand

Information from the Uganda Electricity Generation Company shows that electricity demand, which had been growing at rate of 10 per cent per year, peaked in 2013, when it reached the 500MW mark with only about 12 per cent of the population connected.

Yet Uganda can’t afford the possibility of these two dams becoming white elephants, as the country has to start paying back the debt to China Exim soon after completion of the Isimba in August and Karuma in December.

To pay back the two loans and the more than 2 per cent interest, Uganda is expected to sell electricity from the two dams.

The 20-year repayment period of the loans which were approved around the same time in March 2015, means that Uganda does not not have the luxury of growing electricity demand over time.

In fact, the five-year grace period is coming to an end, and Simon Kasyate, the spokesperson of the Electricity Generation Company says repayment of the loans will start once the dams are completed.

Rural focus

This means that Uganda will just have 15 years within which to pay back the two loans.

Yet, as the ongoing negotiations to reduce Bujagali’s tariff have shown, Uganda’s electricity suppliers struggle to pay back loans with short repayment periods, as this usually translates into an unaffordable tariff for the 1.2 million consumers that pay for the service.

With this in mind, Frank Tumwebaze the Minister of Information announced that the Cabinet had decided to increase the number of people consuming electricity. To do this, Uganda will borrow $212.7 million (Ush782.2 billion) from China Exim.

“Cabinet has approved the proposal to borrow from Export Import Bank of China for the project, bridging the demand and supply gap through the accelerated rural electrification programme,” said the statement from Mr Tumwebaze.

Mr Wandera argues that the initiative will increase the number of people connected to the grid.

To get an electricity connection, Mr Wandera says one has to at least spend Ush90,000 ($24.2), and if a single pole is necessary, the amount increases to Ush330,000 ($88.7) putting it beyond the reach of the average household in Uganda’s rural areas.

But initiatives to increase connectivity of rural consumers have been tried before, without much impact.

In 2012, after the donor community stopped, aiding the subsidisation of electricity consumption in Uganda, money was channelled to connecting rural consumers.

Aid project

The World Bank, the European Union and the German government signed a deal with Uganda and together they invested $22.3 million (Ush82 billion) in a grid-based output-based aid project.

With this money the Rural Electrification Agency, connected over 100,000 households between 2012 and 2017.

The connection of new customers, however, has not had much of an impact on demand, suggesting that failure to consume a lot more electricity has more to do with the expensive tariffs rather than the connection fees.

Until 2012, the government had been subsidising electricity tariffs, but Cabinet took a decision to drop this practice in 2012.

The argument by Cabinet then was that the $200 million that government was losing annually, would be better utilised, if it was invested in construction of more hydopower dams.

Government is now attempting to walk back this 2012 policy, by making concessions to the owners and financiers of Bujagali hydroelectric, so that the tariffs from this power station can be reduced from the current 11 US cents to 5 US cents.